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Business Plan for a Barbershop and Hairdressing Sample
Business Plan for a Barbershop and HairdressingSample
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Table of Contents
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1. Introduction 51.1. Objectives of the study and research questions 5 1.2. Scope and Delimitations 6 1.3. Limitations 61.4. Research methods 7 1.5. Theoretical framework 7
2. Barbering and Hairdressing Industry 7 3. Lappeenranta 84. Effectual Service Entrepreneurship 11
4.1. Business Planning 11 4.1.1.Business idea 11 4.1.2.Business Plan 15
4.2. Service Strategies 16 4.2.1.Strategy 164.2.2.Strategic Planning Approach 20 4.2.3.Strategic Analysis 23 4.2.4.Strategic Implementation 27
4.3. Financial Planning for Start-ups 31 4.3.1.Financial Planning Process 32 4.3.2.Financial Ratio Analysis 40
4.4. Service Pricing Strategies 42 4.4.1.Pricing Objectives 43 4.4.2.Pricing Strategies 44
5. Business Plan for a Barbershop and Hairdressing Salon 51 5.1. Business Model 51
5.1.1.Basic information 52 5.1.2.Business activities 53 5.1.3.Barbershop Blueprint 54 5.1.4.Code of conduct 55
5.2. Market Research 56 5.2.1.Research Methods 56 5.2.2.Competitor Analysis 60
5.3. Strategic Planning – Analysis and Implementation 625.3.1.SWOT 625.3.2.Porter’s Five Forces Analysis 63 5.3.3.Strategic Implementation 65
5.4. Financial Planning 66 5.4.1.Start-up expenses 66 5.4.2.Profitability Plan 68
6. Conclusions 70
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Figures...................................................................................................................71References.............................................................................................................73Appendices.............................................................................................................77
Appendices
Appendix 1 BARBERSHOP DECORATION STYLES
Appendix 2 DIFFERENT HAIRSTYLES
Appendix 3 PRICE LIST
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1. Introduction
“Good intentions might sound nice, but it’s positive actions that matter.” – Tim
Fargo “By failing to prepare, you are preparing to fail.” – Benjamin Franklin
Each and every one of business student might have thought of being an entrepre-
neur once in their study time. However, not all of them are able to become en-
trepreneurs because opening a business is quite risky and usually they are not
ready to take all the risks or set up a vivid and practical business plan.
Everything has a start and business is the same. Business plan is the best start for
implementing a business in real life, such as a business plan for a barbershop and
hairdressing salon, to avoid risks and understand the market well so that the busi-
ness will be profitable and stable.
The author has worked more than one year as a freelancer in this field, therefore,
he has experience and plans to set up a barbershop and hairdressing salon after
graduation. By writing this thesis, he would like to give any future entrepreneur and
insight into the field and how they could establish this business in Lappeenranta.
1.1. O bjectives of the study and research questions
This thesis will be a complete business plan for entrepreneurs or freelancers who
are interested in opening a salon or barber shop for men in Lappeenranta. In this
area, as far as the author notices, there are quite many salons, which are con-
ducted by local citizens but not by foreigners. The number of international students
in Lappeenranta is increasing gradually therefore, the demands for diverse hair-
dressing styles are escalating as well.
The main purpose of this research is how to create a new and modern hair salon or
barbershop which is suitable for male students as well as male locals.
The main research question:
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How to create a practical, applicable and distinctive business plan for a bar-ber and hairdressing salon in Lappeenranta?
Sub research questions:
1. What kind of a potential salon business model might be suitably applied in
Lappeenranta?
2. Is there a potential market for this new and modern salon in Lappeenranta?3. What is the long-term plan for a profitable salon business?
1.2. Scope and Delimitations
This study focuses on barber and hairdressing service for men in Lappeenranta.
Lappeenranta is the only place to conduct the research and survey for the thesis.
Additionally, the aim of this study is clearly defined as a business plan for a barber
and hairdressing salon, therefore, the contents will not include other areas besides
business plan for a salon in Lappeenranta. In other words, geography, industry,
population and sample size are the main delimitations in this study.
This thesis consists of theoretical and empirical parts, which are two main ideas in
the study. In the theory section, the author discusses in depth about effectual en-
trepreneurship, which includes a systematic guide for a business plan as well as
service strategy and building venture identity. The empirical section consists of
project-based content about how to practically open a barber and hairdressing sa-
lon in Lappeenranta, a questionnaire and a survey.
1.3. Limitations
This study is a practical business plan which includes most of the key points to ap-
ply practically. However, due to time limitation, the study does not cover all the in-
depth features. Therefore, there are many assumptions in the study such as as-
suming that the readers have knowledge about basic business terminologies, fi-
nancial calculations, bookkeeping etc.
8
1.4. Research methods
The thesis is carried out as project-based thesis. Quantitative research method is
added to collect information and data for this study and create concrete business
plan. The survey is conducted as English questionnaires on the Internet and re-
sponded by international students in Lappeenranta. The population of this research
is miscellaneous but not big, there are only less than 50 respondents. The ques-
tionnaire consists of 10 - 15 easy and fast to answer questions. The results are col-
lected and analyzed by IBM SPSS Statistics software.
1.5. Theoretical framework
Theoretical framework for this thesis includes theories of business plan, concepts
of entrepreneurship, Porter’s 5 forces analysis, SWOT analysis, Porter Generic
Strategies, Marketing Strategy, risk analysis etc.
The first chapter describes barber and hairdressing service in general, as well as in
Lappeenranta. This chapter includes information about customers’ needs for bar-
ber and hairdressing service, as well as famous salons in Lappeenranta. Business
plan, history, background and concepts of entrepreneurship are discussed as a
base for further study in theoretical part. In service strategy section, business plan-
ning process, service strategy and building venture identity are the cornerstones.
In the empirical part, a business plan for barbershop and hairdressing salon is writ-
ten in depth. Starting with business idea, customer segments are mentioned there-
after. A detailed description of the service of the salon is written in details.
2. Barbering and Hairdressing Industry
Barber is defined as a person who cuts men’s hair and shaves or trims beards as
an occupation (Oxford Dictionary 2018). Additionally, hairdresser is defined as a
person who cuts and styles hair as an occupation. Hence, barbershop is a haircut-
ting shop for men and hairdressing salon could be haircutting and styling store for
both men and women. In this study, hairdressing salon is specialized for men.
9
Barbering services were invented by Egyptian nobility from 5000 B.C. The tools
were crude and made of flint or oyster shells. In the Middle Ages, barbers were
called barber-surgeons since they also dressed wounds and performed surgical
operations. Later, in fourteenth century in England, barbers were divided into two
classes: the ones who giving barbering services and the ones who practiced
surgery. Barbering and hairdressing industry kept developing equipment, technol-
ogy and technique until present. Barbering industry has never become outdated
due to its significant benefits in daily life.
Barbering and hairdressing industry offers personal care, especially haircare ser-
vices. As the industry is developing, the services offered to customers include hair-
cutting, hairdressing, beard trimming, hair dying, face and head massage etc. Due
to the growing number of service types, the market is gradually filled with special-
ized haircare shops, such as beauty salons, barbershops and hairdressing salons
to service various types of customers. Labor in this industry is specialized in differ-
ent titles as well, such as barber, hairdresser, hair stylist, hair colorist and hair de-
signer. Hair stylists are the ones who are trained to style customers’ hair fashion-
ably and professionally. Hair colorists are specialized in hair dying and coloring.
Hair designers are barbers and hairdressers, however, specialized in designing ab-
normal or new hairstyles, transforming customers’ current hair and coloring their
hair as well.
(The National Barber Museum & Hall of Fame 2014).
3. Lappeenranta
Lappeenranta is located in South-East Finland, near the Russian border and is a
part of South Karelia region. The city is a so-called summer town on the shores of
Lake Saimaa as well as university town. According to Statistic Finland, there were
approximately more than 73 000 people in Lappeenranta by the end of 2016.
(Pylsy, J & Marttinen, A 2015).
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Figure 1. Population of Lappeenranta by age groups and sex at the end of 2016
(Statistic Finland 2017)
Besides Lappeenranta University of Technology and Saimaa University of Applied
Sciences, there is Sampo or Saimaa Vocational College, which offers vocational
education, such as hairdresser, beautician etc. and work-related development ser-
vices. Hence, there are quite many barbershops and hairdressing salons in the
town. As a university city, Lappeenranta welcomes a huge number of international
students every year. The demand for affordable haircutting service is proportional
to the number of incoming students. However, compared to other cities, Lappeen-
ranta’s barbershops and salons offer high-end services which are, by some means,
hard for international students to afford.
According to Bureau of Statistics of Finland (2017), barbering and hairdressing in-
dustry falls under “Other Personal Service Activities” category (Figure 2). The fol-
lowing first figure indicates the number of enterprise openings and closures, and
the second figure illustrates this trend of other personal service in Lappeenranta re-
gion from 2015 to the beginning of 2017.
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Figure 2. Other service enterprise openings and closures - by municipality and
industrial activity (Statistic Finland 2017)
Figure 3. Other service enterprise openings and closures trend - by municipality
and industrial activity (Statistic Finland 2017)
In 2015, there were totally 16 enterprise openings and 20 enterprise closures. The
trend raises in 2016 for 25 openings and 23 for closures in total. However, the
number of openings is bigger than closures. At the beginning of 2017, there was a
tendency of increasing in enterprise openings and decreasing in enterprise clo-
sures. According to these figures, other service activities seem to have a promising
future in Lappeenranta.
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4. Effectual Service Entrepreneurship
The word “Entrepreneur” derives from French and was used to describe individual
who take on the risk or undertake a task related to opening new ventures (Bar-
ringer & Ireland 2006). An entrepreneur has various roles in a firm, such as a man-
ager who undertakes an activity, an agent of economic change in terms of effects
they have on economic systems and an individual in terms of psychology, person-
ality (Wickham 2006).
There are various definitions of entrepreneurship through time from simple and
concise to intricate and meaningful. For instance, in 1755, Cantillon defined en-
trepreneurship as “self-employment with an uncertain return”. Additionally, Hart,
Setevenson & Dial implied “entrepreneurship entails the pursuit of opportunity with-
out regard to resources currently controlled, but constrained by the founders’ previ-
ous choices and industry-related experience”. (Volkmann, Torkasi & Grünhagen
2010).
Generally, people are enthusiastic to become entrepreneur because they are en-
thusiastic to become bosses who are able to pursue their unique and new ideas
and receive financial rewards that they deserve. Or simply, “Nothing ventured,
nothing gained”. However, becoming an entrepreneur is getting used to taking and
dealing with risks, which is one of entrepreneur’s tasks. Besides founding new or-
ganizations and owning them, entrepreneur’s tasks include bringing innovations to
market as well as identifying market opportunity. Successful entrepreneur recog-
nizes opportunity, brings innovations out into market and implement it.
4.1. Business Planning
1. Business idea
There is no accurate definitions for good or bad business idea because “there are
only ideas we implement and ones we do not” (Read & Sarasvathy & Dew & Wilt-
bank & Ohlsson 2011). Good business ideas are sometimes disregarded and bad
ones
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are considered as opportunities. Any business idea should be planned and consid-
ered seriously if entrepreneurs intend to implement them.
There are a few steps to whether a business idea is worth implementing or not.
Figure 4. Assessing business idea’s value
Identifying and recognizing valuable idea
A business idea should not be considered as good or bad, any business idea is
worth implemented if it has value. Brainstorming to generate a great number of
ideas is a cornerstone. Next, identifying and recognizing a valuable business idea
is essential. Ideas come from various aspects in life and valuable ideas might be
created based on entrepreneur’s characteristics. Some entrepreneurs identify busi-
ness idea based on their prior experience or creativity or following the trends. Addi-
tionally, interest and enthusiasm of the entrepreneur is as important as recognizing
a valuable idea.
Assessing “doability”
Business Plan in ac-tion
Assessing environment fac-tors
Assessing "doabil-ity"
Identifying and recognizing valuable idea
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Figure 5. Assess Opportunity “Doability” (Read et al. 2011)
After recognizing the value idea, assessing if the idea is applicable is tremendously
necessary. Entrepreneurs should consider external as well as internal factors. Ex-
ternal factors include technological, economical, market feasibility and customer.
Internal factors include financial feasibility and entrepreneur himself/herself. As
mentioned, entrepreneur’s interest and capability in implementing the idea are cor-
nerstones.
Assessing environment factors
There are crucial forces, which affect business both directly and indirectly, which
entrepreneurs must consider.
o Economic force – inflation and deflation – the force decides when con-
sumers are willing to spend their money on products or services to improve their lives.
o Social force – culture, demographic etc. – For instance, high tendency of
opening coffee shops in a society which has habit of hanging out or doing
business in coffee shops.
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o Political force – laws and regulations – entrepreneurs have to mind about
politics when opening business in any place. Political changes affect laws
and how a business should be run tremendously.
o Technological force – staying updated about new technologies is crucial in
modern business. Only one new technology advance might change the way
a business should run. Following new technology helps attract customers
and serve them effectively.
Business Plan in action
After considering “doability” of value idea, an entrepreneur is ready for the next
step: creating business plan. Business plan is a second step in order to implement
business idea in reality.
Figure 6. The Idea-to-Venture Formula (Read et al. 2011)
There are plentiful ideas, action turns mere idea into valuable opportunity. Action is
implementing, finding business partners and interaction with the world. Finally,
commitment turns opportunity into venture. Business plan is a part of commitment
of entrepreneurs into business ideas.
IDEA = ANYTHING + YOU
OPPORTUNITY = IDEA + ACTION
ACTION = FUCTION (INTERACTION) on MONEY, PRODUCT, PARTNERS ETC.
VIABLE VENTURE = OPPORTU-NITY + COMMITMENT
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2. Business Plan
Business plan is a narrative description of a new business, which helps company
develop a “road map” to follow in executing strategy and plans successfully inter-
nally as well as introduces potential investors and other stakeholders with business
opportunity externally (Barringer & Ireland 2006).
Alternatively, a business plan is a written document that details a proposed ven-
ture. It must illustrate current status, expected needs, projected results of new busi-
ness and every aspect of venture needs to be described (Kuratko & Welsch 2004).
Business plan is key factor that set an entrepreneur apart from others. It is not ran-
dom that business plan is one of the main aspects taught in entrepreneurship. A
business plan is essential because it is an internal document that helps an entre-
preneur implement a theoretical business plan in real life from its business model
and solidify its goal. Additionally, it is also a selling document for a company which
provides mechanism for young company to present itself to investors or suppliers
(Barringer & Ireland 2006).
Additionally, a business plan helps an entrepreneur to avoid project which is prone
to failure. Many entrepreneurs get their projects financed by banks or venture capi-
talists after they show promising and concrete business plans. By showing busi-
ness plans to investors, they might seek better investments as well because in-
vestors tend to carefully catch a glimpse of projects that have solid backgrounds.
If being creative is crucial in creating business idea, being conventional in writing
business plan is significant. Investors expect to find critical information easily;
therefore, entrepreneurs should follow a conventional structure instead of creative
one.
There are three main types of business plan: summary business plan, full business
plan and operational business plan. Summary business plan is usually used for in-
troducing ideas and taking a quick insight whether investors are interested in or
not. Next, full business plan is meant for concrete and ready-implemented ideas
that
17
need funding or financing. Finally, operational business plan is blueprint for com-
pany’s operation hence meant primarily for internal employees.
Regardless the types of business plan, a solid, promising and conventional plan
should include executive summary, company description, fundamental business
differentiators, revenue model, operating approach, marketing approach, financial
approach, human resources approach, financial approach and critical risk factors
and risk management.
4.2. Service Strategies
1. Strategy
Every newly born venture is desperate for strategy to be set apart from the others
in the same industry. Strategy gives ventures distinct competitive advantages and
reduces costs, which are essential and crucial. In this part, service strategy will be
discussed the most.
“A firm’s strategy is defined as its theory about how to gain competitive advan-
tages” (Barney & Hesterly 2012). In order to be successful, a venture has to
choose strategy carefully and systematically - strategic management.
According to Wickham (2006), strategy should relate to three elements: product
range, market scope and competitive approach. A firm needs to have clear defini-
tion and description of their products by deciding what type and range of products
they supply to their markets. Additionally, segmenting their customers and market
would be wise as a market strategy in order to focus on targeting right product to
right customers. Last but not least, competitive advantage is key element to distinct
one business to another although they are in the same industry. This approach is
also a cornerstone for sustainable business in highly competitive market or indus-
try. Any strategy in the organization should be aligned with its missions and visions.
In order to have outstanding and effective competitive advantages, entrepreneur
should have clear objectives to conduct analysis externally and internally. Finally,
the
18
entrepreneur derives strategic decisions from analysis and implements strategy as
competitive advantages.
Even though strategy is the cornerstone of an organization, organization’s success
does not totally rely on only it. Without strategy presence, firms are more flexible
for experiments and innovation. On the other hand, according to Mintzberg, lacking
strategy is temporary and even essential. He believes that strategy keeps organi-
zations inflexible when they have to be. This might easily steer firms to sail straight
into iceberg occasionally. Strategies and theories are not reality themselves, even-
tually everything changes and although strategy is based on stability, establishing
strategy becomes liability (Mintzberg & Ahlstrand & Lampel 2005).
Nevertheless, entrepreneurs are usually on the path of excessively concentration
on creating distinct competitive advantages, hence mistaken a bad strategy as a
good one. In the book of the year 2011 “Good Strategy, Bad Strategy”, Richard
Rumelt has indicated diverse types of good strategy and bad strategy from his
point of view, which are worth noticed.
Bad Strategy
Fluff
Fluff could be defined as restatement of the obvious, combined with generous
sprinkling of buzzwords that masquerade as expertise designed to mask the ab-
sence of thought (Rumelt 2012). There is a misconception of marketing, for in-
stance, that the message delivered to customers is unnecessarily wordy, full of im-
plications and complicated concepts. Marketers intend to create outstanding and
different path to successful business or tries to exceed customer expectations
through those messages. Nevertheless, trying to achieve many objectives at once
might be overwhelming for entrepreneur and one will be easily distracted from
firm’s missions and visions. Additionally, if the venture could not meet all customer
expectations, it would be considered as “masking an absence of substance” or
“empty vessel makes the greatest sound”.
Failure to face the problem
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According to Rumelt, a strategy is an approach to overcoming an obstacle, if chal-
lenge is not defined or you fail to identify and analyze the obstacles, you are not
being able to reject a bad strategy or improve a good one or have a strategy
(Rumelt 2012).
Mistaking goals for strategy
An entrepreneur usually makes mistakes performance goals for strategy. For in-
stance, one would list a set of objectives – long list of “things to do” - that a com-
pany should accomplish annually and think that it is a strategy. Strategy, from
Rumelt’s point of view, is obtaining higher performance by identifying critical obsta-
cles to forward progress to overcome them coherently. Moreover, he believes the
need for true strategy work is episodic, not necessarily annual (Rumelt 2012).
Bad Strategic Objectives
Good strategic objectives define critical challenges and build connection between
the challenge and action to accomplish and overcome challenge effectively. A “to
do list” is definitely not a good strategic objective because focusing on solving a
few critical challenges is better than wasting time and effort on so many objectives
and have no clue to overcome them.
The bare-bones of good strategy
There are various reasons for having a lot of bad strategy such as lack of commit-
ment to hard work, following strictly to template without considering the adaptability
of that template-based strategy to an organization’s environment, or the miscon-
ception of new thoughts while it is actually another version of old ideas.
How can entrepreneurs avoid bad strategy?
According to Rumelt, there are three elements in building good strategy:
➢ A diagnosis is simply analysis that defines or explains nature of challenge➢ A guiding policy is overall approach chosen to overcome challenge identified
in diagnosis➢ A set of coherence actions which are meant for carrying out guiding policy
20
According to Barney and Hesterly (2012), strategic management process in-
creases the likelihood that a firm will choose good strategy:
Figure 7. The Strategic Management Process Model (Barney & Hesterly 2012)
After defining long-term purpose and values or so-called mission of the organiza-
tion, an entrepreneur should specifically indicate out measurable targets or objec-
tives for the firm. Strategic planning process occurs right after the objectives are
clearly indicated, which includes strategic analysis (external and internal analysis)
and strategic definition (strategic choice). The following diagram illustrates clearly
the idea of strategic planning
Figure 8. Strategic Planning Process and Essential Business Analysis Tools (Team
FME, 2013)
Mission Objectives
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
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Strategic analysis is quite similar to “a diagnosis” of Rumelt. This step helps entre-
preneur to understand deeply about the nature of firm’s challenges. To overcome
the challenges, “a guiding policy” is needed, which might be called business analy-
sis tools which are Porter’s Five Forces Analysis, Boston Box and SWOT analysis
etc. Porter’s Five Forces and SWOT analysis will be mentioned, explained and
used in this business plan. Finally, strategic implementation is the most important
step to achieve competitive advantages. Rumelt mentioned in “a set of coherence
action” element, planning without any action of implementation would make the
whole planning process useless.
2. Strategic Planning Approach
Before getting into strategic analysis, an entrepreneur should establish a specific
strategy model to assess long-term strategy and ensure that firm’s profitability after
penetrating markets.
For creating ideal and overall picture of promising successful business, Business
Model Canvas is an essential tool to illustrate how a new venture should operate,
especially for start-up or small new business.
Figure 9. The Business Model Canvas (Osterwalder and Strategyzer 2017)
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Key Activities
Key activities, which produce company’s value proposition and compete on a day-
to-day basis, should be mentioned in this block. These activities should be indi-
cated in detail rather than only listing products or services that an organization of-
fers.
Primary questions for this block are, for instance:
✓ How does business deliver their value to customers?✓ Is business going to sell products or offer services with lower price
than competitors?✓ What processes will ensure business run efficiently?✓ How will entrepreneur manage marketing, human resources, cus-
tomer services, finance and R&D?
Value Proposition
Value Proposition is the core of any business. It could be simply the answer to
what the venture does and promises to customers.
Primary questions could be:
✓ How does products or services meet the needs of customers?✓ What value company deliver to customer segments?
Customer Segments
There is a huge market with various types of customers out there for any busi-
ness. Therefore, targeting only a few groups of customers would be the wisest
choice for a new venture to ensure that the business is able to serve the tar-
geted customer segments efficiently.
Key questions for this block:
✓ Who does business sell products or services to?✓ What are customers’ characteristics and personas?
23
Customer Relationships
After defining customer segments, an entrepreneur should focus on building
long-term relationships with the targeted customer segments. There are many
different techniques to retain customers’ loyalty from providing outstanding cus-
tomer service, to offering unbeatable prices and loyalty discounts (Newton
2017).
Key questions that entrepreneur should think of:
✓ How will the venture interact and communicate with customers?✓ How will the business convince customers to use their prod-
ucts or services?✓ How will the business retain customers and maintain cus-
tomers’ loyalty?
Channels
Clear strategies for how venture is going to deliver products or services to tar-
geted customers are extremely important. For a business that offers services,
the most common way are online and own stores.
Key Resources
Key resources are things which give the business competitive advantages both
tangible and intangible assets.
✓ What human, financial and physical resources does the busi-
ness need?
Key Partners
Venture needs strategic partnerships in order to run a cost-efficiently busi-
ness. The most common key partner is a firm’s supplier. An entrepreneur
24
should figure out who are considered key partners and how to maintain
good relationships with them.
Cost Structure
This is a crucial part to recognize what will it cost to launch and maintain a
business. This block will give entrepreneur an overall picture to prepare a
good financial strategy to keep the business running.
Revenue Streams
Simply, this is how business makes money.
Primary questions are:
✓ How much income will customers generate?✓ What is the pricing strategy?
3. Strategic Analy-
sis External Analysis
New emerging businesses are extremely fast-paced born, therefore highly compet-
itive markets are unavoidable. Entrepreneurs usually have the mindsets that com-
petitors within the industry are greatest threats, however, the real threats are these
emerging competitors or new technologies. Porter’s Five Forces Analysis is meant
for determining the competitive intensity, hence, attractiveness of a market
(Fitzsimmons & Fitzsimmons 2011). In other words, Porter’s Five Forces Analysis
is a tool for analyzing organization’s position in the market (strategic positioning).
That is why this is an excellent tool for analyzing external environment of any ven-
ture.
25
Figure 10. Porter’s Five Forces Model
Porter’s Five Forces Analysis was developed by Michael E Porter of Harvard Busi-
ness School in 1979. He indicated that this tool is fundamental for venture which is
going to enter an industry with a new service offering. Five forces model analyzes
the competitive intensity to determine “attractiveness” of the market. The success
of business is not based on which venture is bigger or has more sales or market
shares than the other. On the other hand, profitability is the cornerstone of the
competition. According to Porter, profitability is defined by five forces:
o Competitive rivalry within Industry
This force is the dominance of the whole model because rivalry within industry is
always the main concern of any business. Entrepreneurs should be careful with
this fierce competition because this might reduce everyone’s profitability.
o Bargaining power of customers
Customers are content when business offers higher quality or quantity products
with low prices. This is always an arduous quiz for entrepreneurs to solve.
o Bargaining power of suppliers
Bargaining power of Suppliers
Threats of New En-trants
Competitive
Rivalry
within In-
Threat of Substitute Prod-
Bargain-ing
Power of Cus-
26
Keeping good relationships with core suppliers is extremely important. However,
this is not a simple task. Powerful suppliers have a tendency to raise prices or de-
mand more favorable terms. Therefore, in order to keep balance, entrepreneurs
should have good strategy in negotiating with suppliers. Win-win is the perfect situ-
ation for both sides. In several occasions, business might be in disadvantaged po-
sition. However, “one step back, two steps forward”, hence, if entrepreneurs have
logical and efficient strategy, it is not a totally bad situation.
o Threat of substitute products
New technologies or products are significant threats for businesses, especially for
services. Substitutes threats do not only come from the same but also different in-
dustry.
o Threat of new entrants
Any new entrant creates much tension on the competition within an industry. New
entrants are equipped with recently developed strategy and technology. However,
new entrants are threats only when cost of entry into an industry is lower than po-
tential profits. New entrants will only enter the industry if they could predict that
they obtain profits enough to compensate for their cost of investment. Therefore,
there are barriers that organizations should notice and develop to create significant
obstacles and counter the tension that new entrants cause:
▪ Product differentiation: new entry does not possess brand identifi-
cation and customer loyalty as existing firms. For this reason, new
entrants suffer from standard and start production costs as well as
costs to overcome current firms’ differentiation advantages.
Hence, this is a significant barrier for them to enter the industry if
potential profits are not higher than those costs.
27
Internal Analysis
If Porter’s Five Forces is the tool to analyze external environment, then SWOT
analysis is an essential tool to assess both external and internal environment.
However, unlike Porter’s Five Forces, SWOT analysis focuses more on analyzing
organization’s internal capabilities. SWOT could be used as a simple tool to ana-
lyze every product, service or market. This technique helps entrepreneurs to iden-
tify profitable and suitable market segments for the product or service. Neverthe-
less, this tool has a disadvantage which is its subjectiveness. For this reason,
SWOT should be used as guidance or analyzed by more than one person, which is
a good stimulant for collaboration within a firm. SWOT consists of four key factors
which are Strengths, Weaknesses, Opportunities and Threats. Main objectives of
SWOT analysis are verifying firm’s position against competitors, identifying best fu-
ture opportunities and highlighting current and future threats (Team FME 2013).
StrengthsAdvantages
Unique resources Persuasive qualities
WeaknessesLose sales factors
What should be improved or avoided Eliminate competitive edge factors
SWOTOpportunities
Competitors' vulerabili-ties Current market
trends Niche in market can fill
ThreatsObtacles Com-
petitors' strong pointsSupply costs increase
Figure 11. SWOT analysis model
Positive Negative
ExternalInternal
28
According to the figure, internal analysis includes strengths and weaknesses, ex-
ternal analysis consists of opportunities and threats. By answering the questions
for each section, entrepreneurs will be able to complete the whole analysis.
Strengths and Opportunities are positive factors that entrepreneurs should identify
to strengthen companies’ advantages. On the other hand, Weaknesses and
Threats are negative factors that should be indicated out carefully to improve and
align firms’ capabilities with the market.
In order to reach strategic decisions with SWOT, there are two methods: “match-
ing” and “converting” (Team FME 2013). Managers should “match” strengths to op-
portunities to gain competitive advantages. In other words, combining firm’s
strengths and opportunities could help to highlight strong points of an organization
over competitors. Threats and weaknesses should be converted into strengths and
opportunities by carefully identifying threats as well as weaknesses and developing
or changing them into advantages.
4. Strategic Implementation
Implementing strategy is the key step of the whole process after planning and ana-
lyzing. Considering that an organization is a foundation to launch the projectile –
product or service – into the market, after finishing two mentioned steps, the firm is
ready for launching that projectile by implementing well-prepared strategy. The aim
of strategic implementation is achieving capabilities to compete with rivals and at-
taining “fit” in niche market.
Since organization is considered as a foundation for launching missile, it consists
of many parts which all together build up a concrete base. The following figure il-
lustrates the essential factors to form a strong foundation as well as projectile:
29
Figure 12. Organization as a foundation for “projectile” (Mintzberg & Ahlstrand &
Lampel 2005)
To build up a sustainable base, production and design are two basic and critical
factors platform for the projectile. These are the features that decide the success of
the product or service as well as distinguish a firm’s missile from competitors’.
Meanwhile, support and administration together with sourcing and supply are the
wings to support and align the projectile along the building phase. For business to
function effectively and sustainably, all kinds of resources and assets are crucial,
which support firm’s core competences and capabilities such as ability to produce
products or services inexpensively.
The missile itself consists of three parts. Sales and marketing as well as physical
distribution are the booster for launching the projectile. The top of the projectile is
the products or services that organization will launch into the market (Mintzberg et
al. 2005). In order to launch it effectively to gain competitive advantage, Porter
30
argued that Porter’s Generic Strategies could be applied to characterize the prod-
uct or service.
Figure 13. Porter’s Generic Strategies (Barnes 2003)
Overall Cost Leadership
Cost leadership gives organizations advantage in low producer cost and its strate-
gic target is the mainstream market. Cost leadership is powerful because it is able
to revolutionize an industry. There are several approaches to achieve low-cost
leadership.
o Seeking out low-cost customers: there are two types of customers in a par-
ticular market segment, high-cost and low-cost customers. Low-cost cus-
tomers are the ones who cost less to serve than the other type. Picking out
these low-cost customers and prioritize them might lower much cost leader-
ship for organization.
o Standardizing a customer service: designing routine customer services to
reduce variable costs and stabilize fixed costs.
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o Reducing personal element in service delivery: reducing personal interac-
tions with customers might help to reduce overall costs but should be ap-
plied only when it increases convenient results.
Differentiation
Differentiation gives companies advantage in perceiving high customer value and
its strategic target is also mainstream market. The aim of differentiation strategy is
creating customer loyalty.
o Making the intangible tangible: services are usually intangible by their na-
ture, for this reason, businesses should come up with tangible souvenirs or
objects to remind customers about the companies.
o Customizing the standard product: adding personalizing features such as
mood music, customized surroundings, addressing customers by names
etc. are the ways to build up closer relationships with clients. Customized
products or services are essential to differentiate a business from the others
within an industry.
o Reducing perceived risk: usually when customers are reluctant if they
should use a particular service over others, one of the reasons for them to
be indecisive is trust issues. Providing them more information, building up
brand identity and image or offering warranty are the best way to boost up
risk-taking sense in customers.
o Controlling quality: building trust relationship between customers and orga-
nizations is always crucial and difficult. Delivering consistent level of service
quality is a challenge but also the most essential factor to gain customer loy-
alty and create differentiation as well. (Fitzsimmons & Fitzsimmons 2011.)
Focus
Focus strategy gives both advantages in low producer costs as well as gaining
high customer value. However, this strategy should be applied in niche market in-
stead of mainstream one. In depth, focus could be applied for a particular market
segment to
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serve that customer group more effectively, consequently, achieve competitive ad-
vantages. In other words, this strategy is the application of cost leadership and dif-
ferentiation strategy for a narrower market to attain “fit”.
Mintzberg also claimed that there are generic strategies that could characterize the
missile – product or service – itself:
o Low cost or price differentiation strategyo Image differentiation strategy: nice packaging, service customization etc.o Support differentiation strategy: after-sales service etc.
o Quality differentiation strategy: more reliable, higher performance, more
durable etc.
o Design differentiation strategy: difference in function, different way of ser-
vice operating etc.
(Mintzberg & Ahlstrand & Lampel 2005.)
4.3. Financial Planning for Start-ups
Financial aspect is considered as the most important factor in business. Business
exists for achieving profits from business activities. In order to manage the busi-
ness effectively to pursuit profitability, accounting is the tool for both external and
internal parties to monitor business’ financial state. Accounting is a so-called busi-
ness’ language. Thus, could be considered to have different “dialects” which are
the main different focus areas: financial accounting and management accounting.
Financial accounting focuses on providing essential information for external parties
who are investors and creditors. On the other hand, management accounting is
necessary for gathering financial and nonfinancial information for internal users
such as managers within an organization. Managers use this information to com-
municate, analyze and implement strategy. Cost accounting could be seen as in-
tersection between financial and management accounting. Cost information is pro-
vided to external parties for investments and credit decisions as well as internal
parties for
33
controlling, decision making and evaluating performance. In this section, cost ac-
counting and management accounting are the main focus.
In accounting there are several terminologies that should be understood clearly.
Revenue
Revenue or sales are the amount of money that organization achieves within a
specific period of time, including discounts and deductions for returned merchan-
dise. Revenue per unit is constant. Therefore, total revenue fluctuates proportion-
ally to level of activity or volume.
Cost drivers
Costs drivers are the measures of activities which cause costs in business for re-
quiring the use of resources.
Variable costs
Total variable costs change proportionally to changes in cost driver or level of ac-
tivity or volume. However, on per-unit basis, variable costs are constant.
Fixed costs
Changes in cost driver do not affect fixed costs immediately. Total fixed costs are
constant but on per-unit basis, fixed costs does not change proportionally to vol-
ume.
1. Financial Planning Process
Financial planning in start-up’s perspective is simpler than preparing financial plan
for SME or big companies. A concrete and persuasive financial plan consists of
twelve-month profit and loss projection, twelve-month cash flow projection, opening
day balance sheet and break-even analysis or cost-volume analysis. Additionally,
start-up expenses spreadsheet should be prepared in business plan for entrepre-
neur to have an insight about the total costs since there are many expenses even
before beginning operating the newly-opened business. The aim of financial plan-
ning for start-up is carefully acknowledging total costs of the business to forecast
and maintain the profits equal to or same as break-even point. The process starts
34
by preparing the statements and solid financial business plan. Next step is applying
for loans and capital funding if necessary.
1.1. Start-up Expenses SpreadsheetStart-up costs include registration, insurance, equipment, installation, etc. In the
spreadsheet, the costs could be divided into fixed costs and average monthly costs
as in the following figure.
Figure 14. Start-up expenses spreadsheet example (Brunel University London,
2018)
1.2. Income statement (profit or loss account)The first key financial statement is income statement or so-called profit and loss
account. “Income statement shows whether the difference between revenue
(sales) and expenses (costs) is a profit or a loss over a given time period” (Mariotti
& Glackin 2012). Income statement is crucial because it not only shows the prof-
itability but also reveals problems cause loss in the business.
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Profit and loss account is composed of several key factors such as revenue,
COGS or COSS (Costs of goods sold / Costs of services sold), gross profit, other
variable costs, fixed operating costs, taxes, net profit / loss etc.
COGS or COSS are costs of material used to make products or deliver the service
plus costs of direct labor. Definition of variable costs has been mentioned, so basi-
cally other variable costs have the same idea as variable costs, however, it is cal-
culated by subtracting variable costs from COGS or COSS. Fixed operating costs
consist of various types of costs and usually there are seven common types which
could be easily remembered with the acronym USAIDIR: Utilities (electric, tele-
phone, internet service etc.), Salaries (indirect labor), Advertising, Insurance, De-
preciation, Interest and Rent. According to Mariotti and Glackin, depreciation is the
percentage of value of a tangible asset subtracted each year until the value be-
comes zero. In other words, depreciation is a method of allocating tangible asset’s
value over its lifetime (Mariotti & Glackin 2012). The following figure is an example
for a basic income statement over a period of time.
Figure 15. Basic income statement (Mariotti & Glackin 2012)
36
There is a common expression “bottom line” that we usually hear not only in busi-
ness. It refers to the last line of income statement which shows whether the busi-
ness is profitable or not. Achieving mission and goals as well as filling a need in
community are another “bottom line’ for organization regardless for-profit or non-
for-profit purpose. Therefore, “double bottom line” is essential aim for any type of
company – making profit and achieving mission at the same time.
1.3. Balance Sheet“Balance sheet is a financial statement that shows the assets (what the business
owns, liabilities (debts) and the net worth (owner’s equity) of a business”. Balance
sheet is snapshots of assets, liabilities and equity at a point in time (Mariotti and
Glackin 2012). This financial statement is like financial X-ray through business en-
terprise because it shows company’s financial strategy.
Balance sheet consists of two sides because it follows the rule: 𝐴𝑠𝑠𝑒𝑡𝑠 =𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑂𝑤𝑛𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦. Assets simply are all items company owns
that are worth money, which are reported on company’s balance sheet. There are
two types of assets: short-term and long-term assets. Short-term assets (current
assets) are cash or items that could be turned into cash quickly or will be used by
the business within one year. Long-term assets (fixed assets) are those that will
stay in the business on long-term basis. Liabilities are debts that the organization
has that must be paid. Similar to assets, liabilities also have two types: current lia-
bilities and long- term liabilities. Current liabilities should be paid within one year
and on the other hand, long-term liabilities are paid over a period of more than one
year. Additionally, Owner’s Equity (net worth) is the difference between assets and
liabilities, which shows amount of capital in the business.
The following figure is a good example of balance sheet, which is called horizontal
balance sheet because the structure is presented horizontally. If the structure is
presented vertically, the balance sheet will be called vertical balance sheet.
37
Figure 16. Horizontal Balance Sheet (Mariotti & Glackin 2012)
Opening day balance sheet is the same as ordinary balance sheet, however, it is
meant for measuring the value of total assets of the company in opening day.
1.4. Cash flow statementCash flow statement is one of the most important financial statements as the blood
of start-up company. The statement of cash flow projects the cash flow activities
and the impact of firm’s operating, investing and financing activities on cash flows.
This statement provides information of firm’s cash inflows and outflows (Jackson,
Sawyers & Jenkins 2009). Cash flow statement could forecast when and how
much cash organization should raise. If projected cash balance is negative, com-
pany needs to raise start-up capital. The following figure illustrates twelve-month
cash flow statement in spreadsheet.
38
Figure 17. Twelve-month cash flow statement (Microsoft Corporation, 2018).
1.5. Cost-Volume-Profit AnalysisCVP analysis is sometimes known as break-even analysis, however, it covers
more than break-even thus the name “cost-volume-profit analysis” was born.
Studying the relation between costs, volume and profits by using CVP analysis,
profit-seeking managers could calculate the necessary sales volume to gain target
profit. CVP analysis is one of the simplest tools to examine and analyze in crucial
areas such as pricing policies, product mixes etc. The aim of CVP analysis is to
help managers to make short-term planning decisions.
Break-Even Point
Profits could only be achieved when BEP is reached. Therefore, BEP is the starting
point of Cost-volume-profit analysis (CVP analysis).
39
“Company’s break-even point (BEP) is that level of activity, in units or dollars, at
which total revenues equal total costs” (Kinney & Raiborn A C 2009).
BEP is essential in financial analysis because organizations need to realize the
amount of sales revenue for net income to cover all costs or equal to zero in order
to be profitable. In other words, BEP is the level at which there is neither profit nor
loss. There are two different ways to approach BEP: equation and graphing ap-
proach.
1. Equation approacho Break-even point in euro formula:
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 (𝑒𝑢𝑟𝑜𝑠) = 𝑅(𝑥) − 𝑉𝐶(𝑥) − 𝐹𝐶 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 0
o Break-even point in unit formula:
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 (𝑢𝑛𝑖𝑡𝑠) = 𝑅(𝑥) − 𝑉𝐶(𝑥) − 𝐹𝐶 = 0
= 𝑅(𝑥) − 𝑉𝐶(𝑥) = 𝐹𝐶= (𝑅 − 𝑉𝐶)(𝑥) = 𝐹𝐶
R = Revenue (selling price) per unit → R (x) = Total revenue
VC = Variable costs per unit → VC (x) = Total variable costs
FC = Total fixed costs
x = units or sales volume
CM = Contribution margin per unit
2. Graphing approach
The Figure 18 illustrates an example to graph break-even point. From the graph,
entrepreneurs could easily figure out key points of the relations between costs, vol -
ume of production and profits.
=𝑅 − 𝑉𝐶 𝐹𝐶𝐹𝐶𝑥 =
40
Figure 18. Cost-Volume-Profit Graph (Bhimani, Horngren, Sundem, Stratton,
Burgstahler, Schatzberg 2012)
3. Selling price per unit (R)
From the break-even point in unit formula, we could simply calculate selling price
per unit.
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 (𝑅) =
Changes in selling prices and costs
𝐹𝐶𝑥+ 𝑉𝐶
Break-even point is the first step for entrepreneurs to figure out the amount of sales
revenue to cover all costs for organizations to reach the state of neither profitable
nor loss. However, stopping there is not a wise choice because the main purpose
of business is achieving profits. In CVP analysis, managers might apply BEP to
calculate the target profit as well as target selling price if there are changes in the
business.
(𝐹𝐶 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡)𝐶𝑀
41
From changes in selling price to target sales volume
Supposedly, there are changes in business procedures which make entrepreneurs
decide to change the selling prices or variable costs for products or services, in this
case, selling prices and variable costs are increased. Therefore, instead of only fig-
uring out BEP, managers have to also calculate the target profit to cover the loss of
the business.
In the previous section, contribution margin per unit was calculated as revenue per
unit minus variable cost per unit. With the same formula of break-even point in eu-
ros, this time instead of assuming the equation’s result is zero, we add in the target
profit that the business would like to reach. From there, we could find out what is
the target sales volume that the business should produce in order to maintain prof-
itable. Thus, target sales volume could be calculated as shown in the following for-
mula.
𝑅(𝑋) − 𝑉𝐶(𝑋) − 𝐹𝐶 = 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡𝑅(𝑋) − 𝑉𝐶(𝑋) = 𝐹𝐶 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡𝑋 =
(𝐹𝐶 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡)=𝑅 − 𝑉𝐶X = target sales volume
R = the new selling price per unit (if applicable)
VC = The new variable costs per unit (if applicable)
2. Financial Ratio Analysis
Financial ratios from income statement and balance sheet help entrepreneurs to
analyze their business in greater depth. In business profitability is the most impor-
tant factor, however, noticing other essential factors is necessary as well.
(𝐹𝐶 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡)𝐶𝑀
42
2.1. Income Statement Analysis
Return on Investment (ROI)
ROI is clearly important due to its ability to show entrepreneurs the amount of earn-
ings for their investment. ROI could be calculated on annual and monthly basis,
however, in some cases, managers might calculate ROI on daily basis as well. ROI
consists of two elements:
o Net profit (net income) is the amount of profit beyond what is spent to cover
business’ costs.
o Total investment is the amount of funds that was required to open the busi-
ness plus all additional funding.
From these factors ROI could be calculated as
Return on Sales (ROS)𝑅𝑂𝐼 =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡× 100
ROS is also known as profit margin, which is essential measure of profitability of a busi-
ness. ROS has quite the same idea as ROI:
𝑅𝑂𝑆 = 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡𝑆𝑎𝑙𝑒𝑠× 100
This measurement helps business to figure out a way to earn profit as much as pos-
sible.
43
Figure 19. ROS Table (Mariotti & Glackin 2012)
44
The figure indicates that if a business sells products at low volume or low price,
their margin range has to be high to be profitable and vice versa.
2.2. Balance Sheet AnalysisBalance Sheet also has several important ratios that managers should notice.
Quick Ratio
Quick ratio is a measurement which assists business in noticing whether they have
enough cash to cover their current debt or not. If quick ratio is less than 1, it means
business does not have enough cash to cover all current debt. Hence, organiza-
tions should always keep quick ratio greater than 1.
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 = 𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠Marketable Securities are investments, which could be converted into cash within
24 hours.
Current Ratio
Current Ratio indicates whether a business could sell some of their assets to pay
off all their debts or not. Therefore, firms should keep their current ratio greater
than 1 as well.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠4.4. Service Pricing Strategies
Pricing strategies and techniques are sensitive and complicated because it is not
one-size-fits-all proposition. In order to develop and implement effective pricing
strategies, entrepreneurs must have good knowledge about their companies such
as operational strategies, market segments etc. Pricing strategies should align with
45
company strategy, marketing strategy and objectives for successful outcome.
46
Developing a framework for pricing is the best and most effective way to reach
wise pricing decisions. The following figure illustrates the logical pricing process
that managers should go through:
Figure 20. The Pricing Process (Gemmel, Looy & Dierdonck 2013)
1. Pricing Objectives
Pricing objectives are important when entrepreneurs are confusing if they should
set low or high prices. Additionally, objectives help manager to narrow down the
suitable techniques and strategies that they will apply. Clearly, gaining maximum
profit is the first objective that any organization should set. However, there are
many other essential goals that firms should consider such as:
o acquiring desired market shareo maximizing long-term and short-term profito making fast recovery of investmentso regulating demand
Depending on company’s current strategies and business model, entrepreneurs
could exclude unnecessary goals and include essential objectives for their busi-
ness.
47
2. Pricing Strategies
In modern business, there are variety types of pricing strategies such as cost-
based, customer-based and competition-based strategies. Unlike manufacturing
businesses, service business is different which leads to diverse pricing strategies.
This happens because service businesses could be categorized as service-ori-
ented, product-oriented or people-based. Each type of service business requires
different strategies and has its own difficulties. Barbering and hairdressing service
is mostly service-oriented business. Therefore, this section will discuss and focus
on pricing strategies and structure especially for service-oriented business.
1. Cost-based StrategiesCost-based strategies (cost-plus pricing strategies) are the most popular pricing
strategies due to their applicable versatility, time-efficiency and ease of use. These
strategies could be used to apply in any business type. Entrepreneurs calculate the
total costs for service and add desired profit margin to yield the suitable final price
of the service. This method is also called mark-up pricing technique. For instance,
there are four basic steps to calculate the total haircut price:
1. Service costs per hour
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 =
2. Service price per hour
𝐹𝐶 + 𝑉𝐶 − 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠𝐻𝑜𝑢𝑟𝑠𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 =
3. Mark-up on costs of materials
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
(1 − 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑡𝑎𝑟𝑔𝑒𝑡 %)
𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒 = 𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 ℎ𝑎𝑖𝑟𝑐𝑢𝑡 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 ℎ𝑎𝑖𝑟𝑐𝑢𝑡 (1 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑚𝑎𝑟𝑘𝑢𝑝 %)
Desired mark-up% is the percentage added to cover the costs and it could
be varied depending on entrepreneurs’ strategy.
48
(Mariotti & Glackin 2012)
4. Total service price
49
𝑇𝑜𝑡𝑎𝑙 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 = 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 + 𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒(Gemmel, Looy & Dierdonck 2013)
Cost-based strategies are fast and easy to apply. However, this method has sev-
eral unavoidable disadvantages. Cost-based strategies are mostly based on as-
sumptions and estimations of variable costs, labor costs and markup price. These
costs may change frequently depending on the market and choices of suppliers.
Due to intangible nature of services, costs for service business are difficult to mea-
sure. Therefore, this type of strategy should be used as guidance to have insights
into costs and prices.
2. Customer-based Strategies: The Psychology of PricingCustomer-based strategies clearly focuses on customers and their perceived
value. Managers should notice the basic concept that price should be equivalent to
the service delivered to customers. In other words, customers must feel that they
receive equal value for money, which is so-called perceived value. “Perceived
value is the consumer’s overall assessment of the utility of a service, based on per-
ceptions of what is received and what is given” (Gemmel, Looy and Dierdonck,
2013). Customers have various definitions for value, if entrepreneurs are able to
understand and determine them in depth, they might have appropriate strategies to
define suitable price for the service:
o Value is low price – this type of customers perceive value equal with low price.
o Value is whatever I want in a service – price is not main focus of this type of
clients, benefits they gain from the service is more important.o Value is the quality I receive for the price I pay – value is trade-off for this
type of consumers, price and quality are both important.o Value is what I receive for what I give – besides quality, benefits and price,
this type values other components such as time and effort as well. They
take everything in consideration.
The other components that affect customer’s perceived value is called non-mone-
tary costs, which include
50
o search costs – looking for an appropriate service provider
o psychological costs – worrying whether the price / quality will be suitable or
not
o convenience costs – costs to reach service providero opportunity costs – waiting to be served
This type of strategy includes relationship pricing – building long-term relationship
with customers, flat-rate pricing – agreeing about prices in advance, satisfaction-
based pricing – assuring that there will be no uncertainty in the service etc.
3. Psychological PricingConsumers’ perceived value is subjective that entrepreneur might think that it is
somehow unpredictable. Nonetheless, unbelievably, consumers’ perceived value
or decision-making could be altered or predicted based on several psychological
hidden forces according to Dan Ariely (2008).
Dan Ariely is the author of the best-selling book “Predictably Irrational”, in which he
stated, we – as human beings - “are not only irrational, but predictably irrational –
that our irrationality happens the same way, again and again”, regardless our so-
cial status statuses. “We are all far less rational in our decision-making than stan-
dard economic theory assumes. Our irrational behaviors are neither random nor
senseless: they are systematic and predictable. We all make the same types of
mistakes over and over, because of the basic wiring of our brains”. In the book, he
provided a great deal of descriptions of his experiments as examples for these the-
ories of predictable irrationality.
The Truth about Relativity
The author illustrates this concept of relativity by giving an example of an experi-
ment he conducted with his students about The Economist subscriptions. He no-
ticed the subscription choices that The Economist put up on their website, he then
used this idea to conduct an experiment. In the experiment, he gave the students
two options: Internet-only subscription for $59 and Print-only subscription for $125,
68% of students chose the first option and 32% chose the second one. Subse-
quently, he
51
gave the students three options: Internet-only subscription for $59, Print-only sub-
scription for $125 and Print-and-Internet subscription for $125, drastically, 84% of
students chose the third option, 16% chose the first one and nobody chose the
second one. Logically, the students thought that the third option was the most ben-
eficial one, Print-only subscription costed the same as both subscriptions, it would
be unreasonable if they choose the second option. He conducted several other
similar experiments and the results came out the same.
This experiment indicates that consumers might not know the real value of the
products or services they buy. Their perceived value is totally subjective, hence,
comparing the costs would be the most reasonable way choose the products or
services that they think financially beneficial the most to them. If entrepreneurs
study consumers’ relative thinking in depth, they could manipulate the choices of
consumers, which they usually think they could not. As in the example experiment,
The Economist’s motive behind the put-up choices would be trying to get more
readers to subscribe both internet and print, which costs much more than print-only
or internet-only subscription. (Ariely 2008.)
The Fallacy of Supply and Demand
Anchoring is a term that Ariely uses for this theory. Anchoring is a long-term effect
that influences our willingness to buy a new product or service. For instance, the
first pair of jeans that a customer chooses to buy is worth $20. Although that per-
son’s decision to buy a pair of jeans depends on many things, but the first price
that that person decides to buy affects all his/her decisions to buy jeans from then
on. Next time when that customer buys another pair of jeans, he/she will compare
the price with $20, barely considers the quality of materials of that pair of jeans.
The author suggested in the book that human being’s impressions and decisions
could be imprinted, that we will follow our first decision and impression and be loyal
with them, from that start to compare products which have similar characteristics
based on their prices. That’s why, to price a new product or service, pricing based
on competitors’
52
prices is not essential, instead potential buyers’ perception or perceived value is
more necessary.
There are two concepts that Ariely introduced in “Predictably Irrational” which are
related to this theory: arbitrary coherence and self-herding.
Ariely proved that our minds could be shaped by random anchor but coherently
and logically and that is the meaning behind arbitrary coherence concept. In the ex-
periment, the experimenter asked participants to write down the last two digits of
their social security numbers then guided them to bid on several different items.
Surprisingly, participants who have highest-ending social security digits bid higher
than those who have lower-ending social security digits. The social security digits
become the anchor because the experimenter asked them to jot down the numbers
and since then participants start to subconsciously bid according to that arbitrary
anchor. Additionally, the more they bid, the lower the bids get. This is an example
for coherence as we unintentionally follow our previous decisions but our decisions
are logically coherent with each other.
Supporting this anchor concept, Ariely reminded readers about the concept of be-
havior herding. We usually assume that the restaurant is good if there are many
people accept to waste their time to get a table in there. They must have been to
that place many times and the food must be good. We tend to follow the crowd be-
cause we make assumptions based on other people’s previous behavior.
Additionally, there is another type of herding which is called self-herding. To ex-
plain self-herding concept, Ariely gave an example of a person who frequently went
to a coffee shop, however, one day he had to go to Starbucks for coffee. He hesi-
tated at first but after he drank coffee there two times, he started to think that the
coffee was not that bad and expensive. Eventually, he did not resent the price he
paid for Starbucks anymore and started to drink coffee there although the price
was more expensive than his frequent coffee shop. He looked back at his previous
decisions and thought that the coffee was not that bad, therefore, he continued go-
ing to Starbucks. In other words, he had set up new anchor for coffee. At the same
time, Starbucks actually did create new anchor along the way to imitate more self-
53
herding
54
effect. Instead of calling their coffee cups “small”, “medium” and “large traditionally,
Starbucks offered “Short”, “Tall”, “Grande” and “Venti” as well as other fancy coffee
names. Their strategy was creating new anchor which somehow prevented cus-
tomers from comparing their coffees with traditional ones. Hence, their customers
will be willing to pay higher prices for the fancy coffee names and the moment they
decided to pay for the coffee, they have set up new anchor for themselves. (Ariely
2008.)
The Effect of Expectations
In this part, Ariely tried to prove the truth behind “When we believe something will
be good, it generally will be good, and when we think it will be bad, it will be bad”.
He used experiments to prove that if we were informed about the product that we
were going to consume, that could change our perceptions about the product. The
preliminary information we have is responsible for our actual experience after using
or consuming a product. Furthermore, the author mentioned caterers usually try to
create detailed descriptions for their food. One caterer says that she serves “deli-
cious Asian-style ginger chicken” and another one says that she offers “succulent
organic breast of chicken roasted to perfection and drizzled with a merlot demi-
glace, resting in a bed of herbed Israeli couscous”. We could not judge if one dish
is better than another only by their names, but definitely, the second description of
the dish raises our expectations for it. We easily shift our attention to the second
dish and crave to taste it. This also proves that marketing plays key role in building
reputation of a brand or product. However, overmarketing but under delivering is
not the goal for true entrepreneurs or marketers. Entrepreneurs should make sure
that they market the products or services in details but not overmarket it to raise
customers’ expectations and deliver them carefully and professionally to customers
(Ariely 2008.)
55
The Power of Price
Ariely mentioned “The Placebo Effect” in this part. To explain this concept, he used
several examples such as a surgeon did an experiment of knee arthroscopy on pa-
tients. One group he did real surgery and another one he did simulated surgery
which was just a couple of incisions to imitate the real surgery as the other group.
The result was stunning, both of the groups reported the same pain relief and im-
provements in walking. This experiment was also an example how expectations
shape our minds and made placebos work. Furthermore, the author pointed out
that prices could influence our placebo effect as well not only in medical environ-
ment but also in everyday life.
There were two phases of this experiment which Ariely tried to prove how prices in-
fluenced our placebo effect. In the first phase, he divided a group of students into
two groups. Half of the students bought this energy drink SoBe at full price and the
other half bought it with discount. After that, they were instructed to solve puzzles.
The following table illustrates the result for the first phase of experiment.
Group Right
answer
1 Had not drunk SoBe 9 out of 15
2 Drank SoBe – full price 9
56
out of 15
3 Drank SoBe – discounted price 6.5 out of 15
Figure 21. SoBe experiment phase one
The result for phase one led the author to the conclusion that “price does make a
difference”. However, there seems to be no difference between the group had
drunk SoBe with full price and the one had not drunk SoBe. He raised a question
whether SoBe did not make people smarter. Eventually, he did the second phase
of the experiment to test that theory. In phase two, he printed on the cover of the
quiz booklet: “Drinks such as SoBe have been shown to improve mental function-
ing”, emphasizing, “resulting in improved performance on tasks such as solving
puzzles”. The following table illustrates the result for the second phase of experi-
ment.
57
Group Right an-swer
1 Had not drunk SoBeWorse
than
the
last
two
group
s
2 Drank SoBe – full price
3 Drank SoBe – discounted price
4 Drank SoBe – full price – read the
message12.3 out of
15
5 Drank SoBe – discounted price – read
the message
7.1 out of 15
Figure 22. SoBe experiment phase two
The result proved that the message and the price were arguably more powerful
than the drink itself. This experiment was a good example that we usually assume
cheap products or services are worse than ones with higher prices. Therefore,
“placebos pose dilemmas for marketers”. In real life, placebos are not always bad,
managers could use the power of placebo and price to create differences as long
as they are aligned with companies’ strategies.
5. Business Plan for a Barbershop and Hairdressing Salon
5.1. Business Model
As discussed in previous sections, Lappeenranta is a so-called university town,
which has a decent number of students every semester. Hence, opening a barber-
shop and hairdressing salon for male students is a valuable idea. Getting to the
main aim of the whole study, concrete business plan for the barbershop is going to
58
be discussed in depth at this point.
The barbershop preliminary name is “Lost World”. The following figure of Business
Model Canvas illustrates an overview of Lost World’s business model.
59
Figure 23. Business Model Canvas of Lost World
1. Basic information
Basic information and business activities are discussed partly based on market re-
search data gathered from online questionnaire. The details of the data will be dis-
cussed in Chapter 6.
According to the data of market research, Lost World’s ideal location is in the Uni-
versity area. If the business gained much profits, branches would be opened in
Sammonlahti and Kourula areas. Among the University area, there is one hair sa-
lon called “Pääasia Parturi Kampaamo” and it is located in Laserkatu 8, 53850
Lappeenranta, which is Lost World’s future competitor. The author notices that
most of the students know Pääasia since it is near the university. This is also a
concrete reason for the author to decide Lost World’s location. Opposite to Pääa-
sia, there is Lappeenranta Student Housing Foundation (LOAS) and next to LOAS,
60
there is
61
Technopolis – Work space expert organization. The exact location of Lost World
will be Laserkatu 6, 53850 Lappeenranta as the author decides to rent an office
from Technopolis for the barbershop (Figure 24). Lost World’s visibility will be
boosted since its location is near LOAS, where most of the students must visit to
find their apartments.
Figure 24. Lost World’s Location
After analyzing data from the research, the author decides to design Lost World as
gentleman’s and typical barbershop in combination. Since Lost World has quite a
low budget, building it as solely gentleman’s barbershop would not be cost-effi-
cient. Hence, a combination of sophisticated and modest design is suitable for the
budget and customers might not feel overwhelmed by fancy decoration. The blue-
print for Lost World will be discussed in depth after this section.
2. Business activities
Lost World’s primary services are haircutting, beard trimming and hair consultation.
Hair dying, head massage and home service will be taken into consideration after
Lost World has decent amount of fame and profits. The author’s ambition is devel-
oping Lost World into a salon which has haircutting home service. When a
62
customer needs a haircut urgently yet could not come to the shop, one employee
immediately departs for customer’s apartment to fulfill his demand. Service prices
will be illustrated in price list as single service and packages. Price list for Lost
World is attached as Appendix 3.
As mentioned before, the primary customer segment of Lost World are male stu-
dents in Lappeenranta and the barbershop is optimized for male in Lappeenranta
in general. Specifically, for the male students who have low and mid-income and
care for their look. In the open-ended question section of the questionnaire, there
are a couple of respondents who express that it would be perfect if Lost World
could offer African haircut. Since the author has been working as freelance barber
for students, he has a decent amount of knowledge and experience to give haircut
for a good deal of hair types including African hairstyle.
In order to increase Lost World’s visibility to potential customers, the author will
market the barbershop primarily via social media, website and word-of-mouth.
Since word-of-mouth is the most effective way to market in Lappeenranta, which is
discussed in research method section, the author will target this as main marketing
strategy. The strategy will be mentioned in detail in strategic planning section.
Next, Lost World’s potential key partners could be divided into two groups: suppli-
ers and preferred brands. Wahl, Babyliss and Phillips provide mid-range profes-
sional haircutting tools which are high quality, reliable and suitable for Lost World’s
budget. The tools and furniture of Lost World will be mainly supplied by Amazon
and IKEA. Amazon is famous for reliable world-wide service, therefore, the haircut-
ting tools will be ordered from them. IKEA is available in Finland and they offer
good quality products with reasonable price, hence, ordering furniture from them
would be cost- efficient, such as low shipping cost.
3. Barbershop Blueprint
Floor plan for Lost World is designed by the author who is not a professional archi -
tecture. Hence, technical annotations are not included in the blueprint and several
essential building’s features are not mentioned. Nevertheless, the floor plan
63
is designed by realistic measurements. The expected area of the barbershop is 60
square meters with 10 meters of length and 6 meters of width. There are three
main sections in the barbershop. First of all, the waiting hall includes reception,
lounge and recreation regions. Lounge and recreation regions are designed to
compensate for customers’ waiting time. Next, the haircutting region includes must-
have haircutting place and customer consultation table. This table is meant for con-
sulting customers about hairstyling, hair care, service offerings etc. Last but not
least, toilet region is primarily designed for male as well as disabled customers.
Regarding the theme for decoration, the author plans to paint the barbershop in
black and white. Colors of the furniture will mostly in green with hints of yellow. The
floor plan’s colors is only for illustration. The following figure illustrates the floor
plan for Lost World.
Figure 25. Lost World’s Floor Plan
4. Code of conduct
Lost World will be built base on tangible and intangible key resources. Along with
64
tangible assets such as brick-and-mortar shop, professional haircutting tools etc.,
65
Lost World’s intangible assets are tremendously essential since value propositions
are created based on them. Passion, enthusiasm, meticulousity, long-term experi-
ence and working ethic are the best examples for intangible assets.
Hygiene is the first principle in Lost World’s code of conduct. Since haircutting tools
will be used on a huge number of customers, they should be cleaned and main-
tained twice every week. The tools will be sterilized by suitable liquid, especially
the sharp tools. The barbershop will always be cleaned to avoid masses of hair
coverage on the floor.
The barbershop will be run by passion, enthusiasm and meticulousity, hence, the
success of every haircut will be guaranteed. Moreover, the author has long-term
experience in cutting a great deal of hair types, although customers could not fully
express their wish for the haircuts, he still be able to give them just-as-requested
ones. Each customer will have customized experience depending on their de-
mands with reasonable prices. These are the most precious and priceless cus-
tomer value propositions of Lost World.
Competition is essential for Lost World’s development, therefore, fair competition is
extremely valued. The purpose of opening a new barbershop near Pääasia is not
solely for directly competing with them but promoting a haircare business area near
university region. This is a win-win situation for both businesses and customers.
5.2. Market Research
1. Research Methods
Data for this study was collected by questionnaires. “Questionnaire is a data- col-
lection instrument. It formally sets out the way in which the research questions of
interest should be asked.” (Proctor 2005). Conducting a survey by questionnaires,
primary data is collected to be analyzed for research purposes. Primary data is the
original data obtained directly by researcher through surveys, interviews and ques-
tionnaires (Investorwords 2018).
66
The questionnaire for “Lost World” was created online on Google Forms platform
with the name “Demands For New Barbering Service”. The questionnaire includes
eight main sections. The cover letter was prepared simply in section one to raise
awareness of the survey’s purpose to gather information on male student’s inter-
ests to visit a new barbershop in Lappeenranta. The questionnaire was distributed
via social media platform, which is Facebook group for international students in
Lappeenranta as well as other student groups’ Facebook pages. Primary data is
analyzed directly by Google Forms. Totally, there are 24 respondents, 22 males
and 2 females. However, since the purpose of the study is gathering male stu-
dent’s interests, if the respondent is female, the form is submitted right away. In
brief, only 22 responses were accepted as the results for the study.
First section consists of questions regarding basic information of the respondents.
81.8% of the respondents are students and currently live in Lappeenranta, who are
from Netherlands, Finland, USA, Singapore, Germany, India, Vietnam, Venezuela,
Russia, Malaysia, Tanzania, and France. Almost half of the respondents are from
Finland and Germany. Furthermore, 86.4% are 17 to 25 years old. Only 13.6% are
26 to 35 years old and nobody is more than 36 years old.
In the next section, respondents are divided into two groups depending on their an-
swers to the question if they have visited a barbershop in Lappeenranta. The pur-
pose of this segmentation is to gather experience and expectations from the re-
spondents who have already had a sense of how barbershops in Lappeenranta
are. 36.36% of respondents reply that they have visited barbershops in Lappeen-
ranta and most of them know the shops through friends. This is an interesting point
since on the one hand, social media is often overrated by entrepreneurs. On the
other hand, social media’s efficiency depends on the environment or the market.
This data shows that the word-of-mouth advertising is more advantageous and ef-
fective in Lappeenranta. Figure 26 illustrates the frequency of barbershop visit of
the respondents.
67
Figure 26. Frequency of barbershop visit.
According to the figure, only one fourth of the respondents visit barbershops once
a year and most of them have haircuts frequently. One a scale from one to ten,
62.5% of respondents rate their experience after visiting barbershops seven and
eight points. They indicate that they pay from 21 to 30 euros for the service, only
12.5% pay more than 31 euros. 37.5% of respondents imply that they have extra
service besides having haircuts, which are beard trimming, massage and hair con-
sultation.
The following section is the most essential one since it is related to the main aim of
the survey, which covers the expectations of future potential customers for Lost
World. Regarding to the decoration for Lost World, the first question is about the
style of barbershop that future customers prefer. To illustrate clearly the idea of
decorating style, images will be attached as Appendix 1.
Typical style illustrates the classic decoration, common style is meant for simple
and minimalistic decoration and gentleman’s barbershop will be furnished in quite
the same way as barbershops in England. 37.5% of the experienced respondents
express that they would like to visit gentleman’s and typical barbershops, 25% pre-
fer common style. On the other hand, 58.3% of the inexperienced potential cus-
tomers express that they prefer to visit gentleman’s barbershop and are willing to
pay only 10 to 15 euros for a haircut. This group favors typical style the least.
As essential as barbershop decoration style, hairstyle is the second issue men-
68
tioned in the questionnaire. There are five types suggested such as common, mod-
ern,
69
design, medium long and long. To avoid misunderstanding between common,
modern and design haircuts, images will be illustrated in Appendix 2.
Common hairstyle includes any form of short and classic style. Modern style is re-
lated to hairstyles with quiff, undercut, tapered side etc. Design hairstyle indicates
hairstyles with clear lines, asymmetrical sides etc. 62.5% of the experienced group
imply that they prefer to have common haircuts and one fourth favor design hair-
style. Quite the same as experienced group, 66.7% of the inexperienced group fa-
vor common hairstyle, half of the rest prefer medium long haircuts and the rest
think modern haircut is the best. Design hairstyle is not favored by this group.
Furthermore, preferable price range is also discussed. The following figures illus-
trate potential customers’ price preferences.
Figure 27. Experienced group price range preference.
Figure 28. Inexperienced group price range preference.
70
According to the figures, the experienced group is quite generous compared to in-
experienced one. Half of the experienced group is willing to pay 16 to 20 euros for
a haircut, nonetheless, more than half of the inexperienced one prefer to pay 10 to
15 euros only. Moreover, most of the respondents from both groups agree to some
extent that the barber should cut their hair slow and tender.
Regarding the location of Lost World, responses of the questionnaire show that
both groups favor to visit the barbershop if it is located in the University or Sam-
monlahti Area the most. The inexperienced group even prefers the University to
Sammonlahti Area.
Finally, there are two open-ended questions in the questionnaire, of which purpose
is gathering respondents’ opinions on how they choose a barbershop over another
and what should be improved to increase their satisfaction of haircutting service.
55,56% of 18 respondents reply that they would choose a barbershop over another
if the price is low and the quality is reasonable. Approximately 11,11% of respon-
dents’ decisions rely on good barber who is able to deal with any hair type. The
same percentage of respondents indicate that recommendations will influence their
decisions. Regarding to customer satisfaction, most of the replies favor good at-
mosphere while getting haircuts without waiting or appointment booking.
2. Competitor Analysis
The market research on potential customers’ opinions raises valuable points for
Lost World’s development as well as competitor analysis. Since Lappeenranta is
not a big town, all competitors in the main area should be considered regardless lo-
cation. There are quite many competitors, however, there are two main competitors
that Lost World should notice which are M Room and Pääasia. M Room is Lost
World’s direct competitor since they are also barbershop and have quite the same
business model. Pääasia is a hairdressing salon which is located quite close to
Lost World and they have branches in popular areas such as the university and
Sammonlahti areas. Besides, there are several popular hairdressing salons such
as Hiustalo, Emotion etc.
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M Room
M Room Lappeenranta is a branch of M Room chain barbershops which are lo-
cated all over the world. Not only a basic barbershop, M Room also produce their
private hair products.
M Room Lappeenranta is located in the city center. They have quite a few
strengths which are highly competitive. Male segmentation is definitely their first
strength since they are one of a few barbershops in Lappeenranta’s city center.
Professional atmosphere with modern and simple decoration is their next advan-
tage. They create a high-end and reliable environment through cutting style and
“home-made” hair products. Moreover, they understand their customers’ needs
quite well since they know that male customers need haircuts frequently. There-
fore, they provide membership packages such as basic, silver, gold and platinum
to encourage their customers to visit for haircuts with less hesitation due to high
prices.
Nevertheless, M Room’s prices are still high for students’ budgets since they indi-
cate that the price for student haircut is 25 euros and it is only valid from Monday to
Thursday, from 10 am to 2 pm. Moreover, hard-to-access location is also their
weakness since the barbershop is located in the city center which is far from stu-
dent apartments’ areas. The author collected feedbacks from students who have
visited M Room and realized that cutting international students’ hair is not their
strength. Their style of cutting hair is rather conventional and formulaic, which is
more suitable for European men than international ones. After a couple of visits to
buy hair products from M Room, the author realized that M Room does not have
good employee management. Since they do not have product consultant, barbers
have to stop cutting hair to sell products and the current customer has to wait.
Pääasia
“Parturi-Kampaamo Pääasia” is the full name of Pääasia hair salon. Unlike M
Room, Pääasia is a hair salon.
72
Pääasia has branches in easy-to-access and convenient locations such as univer-
sity and market areas. The branch in university area has a professional atmos-
phere and their cutting style is quite versatile.
Nonetheless, Pääasia’s prices are relative high. A normal haircut costs from 26 to
29 euros. If only machine is used, it costs 19 euros. Hence, their prices are not
suitable for students’ budgets as well.
5.3. Strategic Planning – Analysis and Implementation
1. SWOT
SWOT analysis is one of the key factors to build up suitable strategy for a com-
pany. Although this analysis is subjective, it helps entrepreneur to gain insight of
firm’s strengths and weaknesses and from there recognize opportunities as well as
prevent threats.
Strengths
The author’s experience in cutting many types of hair and dealing with international
customers and reasonable price are definitely Lost World’s noticeable advantages.
In the survey, open-ended questions section, there are quite a few respondents’
opinions that they would be impressed if the barber could give them just-as- re-
quested haircuts although they are not able to use professional terms to describe.
The author is confident that that demand will be fulfilled since he has been giving
haircuts exactly in that sense. With visible and easy-to-access location as well as
different decoration style, Lost World could attract quite many busy and curious
customers.
Weaknesses
Superficially, Lost World has quite promising future due to its advantages and pric-
ing attractiveness. Nonetheless, weaknesses could surpass strengths if the man-
ager is not fully aware of possible risks and negligent in decision making. Unstable
income is the first weakness of Lost World. Since the income of the barbershop
mostly relies on international students, in low seasons, Lost World might face un-
73
profitability. Long
74
waiting time is another weakness that should be taken into consideration. There
will be possible busy hours that customers prefer to visit for haircuts. Due to limited
budget, Lost World could not employ more than three barbers. Balancing the qual-
ity of each haircut and reducing customer waiting time is a tough matter. Inconsis-
tency of skills and experience between barbers is also a considerable issue.
Opportunities
At the moment, Lappeenranta is a land of opportunity for Lost World. There is only
one direct competitor which is M Room, however, it is located in the city center,
whereas Lost World will be located in the university area. With reasonable prices,
code of conduct and a current decent amount of fame of the author, Lost World
could attract quite many students in town and possibly have a good number of
loyal customers.
Threats
Moreover, considering potential threats and risks could help to prevent possible fu-
ture loss and foresee difficulties to prepare for the worst scenario. There are many
possible threats in the long run, however, these are noticeable risks that could be
seen. Firstly, Lost World would inevitably face the threat of newly-opened salon or
barbershop in the future. Secondly, competitors could reduce their prices or give
customers discounts to compete. Next, if the manager does not develop home ser-
vice in suitable time, there is a risk that the competitor would adapt the concept in
their business model before Lost World. Last but not least, hiring qualified barbers
to fill in empty chairs could tighten Lost World’s budget and profits if the manager
does not have a good financial plan.
2. Porter’s Five Forces Analysis
Understanding the business itself is not enough. The manager needs to have a de-
cent amount of knowledge of the industry in the area that he/she plans to open a
business. After SWOT analysis for internal insights, Porter’s Five Forces Analysis
is
75
the most suitable tool to analyze external environment. The following figure demon-
strates Lost World’s Porter’s Five Forces analysis.
Figure 29. Porter’s Five Forces analysis of Lost World
Competitive Rivalry Within Industry
The competitions within hair care industry is always high since customers have
much power in their hands. Specifically, barbershops could easily lose a customer
if their services do not meet customer’s expectation only once. In Lappeenranta,
the competitive environment is not that fierce, especially when Lost World has
quite different customer segmentation and operating strategies. In spite of that,
Lost World still has to face rather intense competition.
Threats of New Entrants
At the moment, new entrants are not big threats for Lost World. Due to the fact that
there are fairly enough hair salons in the main areas of Lappeenranta, the rate of
opening new salon or barbershop is rather low.
Bargaining Power of Customers
Threats of New Entrants
MEDIUM
Competitive Ri-valry within In-
dustry
HIGH
Threat of Substi-
tute Products
LOW
Bargaining Power of Sup-
pliersMEDIUM
Bargaining Power
of CustomersHIGH
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As mentioned before, in this industry customers have much power. Since they
could shift their attention and decisions easily if they find out new and good barbers
or hairdressers. Nevertheless, barbers or hairdressers could reduce the risk of los-
ing customers by focusing on the quality of their services and listening to cus-
tomers’ demands.
Bargaining Power of Suppliers
Key suppliers for Lost World have been mentioned in previous section. Moreover,
there are several suppliers whose products are cost-efficient and good quality such
as L’oreal and Schwarzkopf. There are quite many suppliers that the manager
could choose from. Therefore, the bargaining power of suppliers is medium.
Threats of Substitute Products
Due to the importance of hair care in daily life, the threats of substitute products in
this industry is low. The one and might be only way to substitute is doing haircuts
or taking care of hair at home, which are not always working.
3. Strategic Implementation
Lost World’s operating strategy must always be aligned with its code of conduct.
The first concern is definitely opening hours. Typically, hairdressing salons in
Lappeenranta is opened from 9AM to 8PM in the center such as Hiustalo and from
9AM to 5-6PM in other regions such as M Room and Pääasia. Some of the salons
still operate on Saturdays but they are all closed on Sundays. According to the re-
sult of the survey, potential customers wish to visit Lost World from 1.30PM to 9PM
the most. The author suggests opening the barbershop from 12PM to 8PM all
week days except Sunday.
Entrepreneurs usually overestimate branding strategy since branding is one of the
most important factors for the success of a business. Nonetheless, branding is
rather simple if managers understand the key to create deep connection between
customers and brand. Customers are people not enemies, hence, managers
should stop bombarding and analyzing them with overhyped messages or prom-
ises.
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Alternatively, approaching customers with positive manner, delivering not only
products or services but experience to fulfil their desires and prove that the brand
is trustworthy among numerous other brands are the cornerstones to influence
customers’ choices. By applying code of conduct, caring for customers’ experience
and providing services with passion, the manager could already build magnificent
venture identity for Lost World. The author decides the slogan for Lost World is
“The Forgotten Passion” since passion is the motor of the barbershop.
Regarding human resources management, since inconsistency of experience and
skills among barbers is a possible weakness, the author suggests that managers
should arrange testing and training phase for employees to make sure that their
skills aligned with Lost World’s requirement.
Waiting time management is significant for Lost World. From the blueprint, in
lounge region, the author suggests manager to place a billiard table for recreation.
Reservation on the website is another excellent option. Besides, although Lost
World will be closed on Sunday, the author suggests to consider opening on Sun-
day according to the number of customers’ reservations, not only to maximizing
profits but also managing the schedule for busy customers.
Pricing strategy and explanation will be discussed in the next section.
5.4. Financial Planning
1. Start-up expenses
Expenditure estimation is one of the most important steps in financial planning for a
start-up company. Through the estimation, an entrepreneur could recognize the
amount of budget that he / she should prepare. The following table illustrates the
first four months expense estimation plan for Lost World. There are essential costs
in the first month which are one-time costs to open a business. This table only illus-
trates the estimated costs since there are so many costs to take into account, the
author could not predict all the costs.
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Figure 30. Estimated quarter expenses
For the first four months, the cost to run the business is approximately 80,000 eu-
ros. The author plans to apply for funding in order to cover the costs. The following
table illustrates the author’s plan for funding.
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Figure 31. Funding plan
2. Profitability Plan
The first step of determining the goal for profitability is CVP analysis. Break-even
point analysis is the crucial part. This analysis is created for the second month
since the first month includes one-time costs. The figure below demonstrates
break-even analysis for Lost World. Assuming that all the customers coming to the
barbershop are students and they only use the basic service which costs 20 euros
(VAT 24%), minus 10% equals 18 euros. 18 - 20 euros per haircut is considered as
an ideal price from the author’s view. Since the average price of 25 euros per hair-
cut of other barbershops has numerous limitations for customers such as machine
cutting only, specific time for specific price etc., cheaper price with no limitation
would definitely be favored by customers.
According to the table, the number of haircuts per month that Lost World should
reach is approximately 830, around 28 haircuts per day to be profitable and roughly
780 haircuts a month is the breakeven point. Approximately a barber needs 30
minutes to fulfill all demands of a customer. Hence, in eight hours of operating a
barber could give 16 haircuts. Based on that number, ideally Lost World could
reach the number of 48 haircuts per day. That’s why 28 haircuts per day is a reach-
able goal.
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During operating, if the costs to maintain the business increase by 30%, 1020 hair -
cuts per month and 34 haircuts per day are the numbers that Lost World needs to
reach to breaks even.
The manager should try his/her best not allow the costs increase by 50% since the
business will be easily on the edge of unprofitable. Nonetheless, these figures are
estimation, the author emphasizes that this study could not cover all the costs.
Therefore, applying these costs with caution is highly recommended.
Figure 32. Break-even Analysis
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6. Conclusions
The objective of this study is to construct a solid business plan for a barbershop or
hairdressing salon mainly for male students in Lappeenranta. The business plan
was divided into two main sections, theoretical and empirical part, in order to build
up a solid framework for the whole thesis. The author believes the most important
factor of a successful start-up company is a business plan since the plan must in-
clude essential theories and support researches for future business.
The theory section consisted of business planning, services strategies, financial
planning and pricing strategies. The theories were accumulated and selected from
mainly reliable books and references.
The empirical section was constructed based on theoretical part but more in depth.
This section included business information, activities, blueprint, market research,
SWOT analysis, Porter’s Five Forces Analysis and financial planning. In order to
prove the information in the study was reliable and accurate, survey was con-
ducted to gather potential customers’ opinions.
Business plan has always been a broad and complicated topic since it contains a
large amount of information. The journey of writing this thesis was quite tough for
the author. Due to lack of experience in academic writing and doing researches,
this study is a challenge for him. However, he managed to finish the thesis with a
fair number of benefits. He has gained a large amount of knowledge and experi-
ence that he lacks from the start. The thesis was created by passion and meticu-
lousity, hence, the author believes it is a reliable source for entrepreneurs who
have the same mindsets and ideas. Nevertheless, due to several limitations that
were mentioned, the author suggests entrepreneurs conduct further researches to
achieve desired objectives.
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Appendices
Appendix 1 BARBERSHOP DECORATION STYLES
Typical barbershop style (Google Images)
Common barbershop style (Google Images)
Gentleman’s barbershop style (Google Images)
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Appendix 2 DIFFERENT HAIRSTYLES
Common hairstyle (Google images)
Modern hairstyle (Google images)
Design hairstyle (Google images)
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Appendix 3 PRICE LIST
Lost World’s Price List (Canva)
